Wednesday, December 24, 2008

The latest issue of Technical Analysis of Stocks & Commodities arrived the other day. Trade-Ideas contributes an article to their widely read section, "Traders' Tips", which showcases a particluar article that month and allows various vendors to be inspired how they might model such a strategy in their application.

One of the reasons I like the section (and the magazine) is how favorably Trade-Ideas methodology compares to that of the other vendors. Where they present endless formulas and equations, Trade-Ideas takes a snapshot of the configuration screen that shows the icons we use to create the strategy. Pretty simple.

The latest issue (February) did, however, print a mismatched graphic within our article - causing some confusion. Because of this simple error, I will reprint all the original, unedited articles here at the blog and will continue to do so each month.

November's Issue - "Skate to Where the Puck Will Be"

A fading strategy that uses speed to uncover a backtested and winning advantage in this volatile market

Wednesday, December 17, 2008

The best athletes use coaches who don't give up when their performer wants to quit. They carve out the negativity and bad habits of the athlete and leave nothing but the will and the means to win.

As our coach, the Auto Trading Bot, makes us a better trader.

The latest videos from Monday, December 8th and Friday, December 12th are posted on the Trade-Ideas YouTube Channel. Our approach with the automation is to use 3 Long strategies and 3 Short strategies (not necessarily the flip of the other). These strategies are run through our backtesting module, The OddsMaker, to ensure high odds of success before a dime of capital is committed.

Monday was our 1st attempt of a Battle of the Bots! Watch as we pit two automated trading plans against each other: a tortus and a hare. You can guess who wins.

Friday saw us rack up an impressive $861.46 in just 15 minutes time. Watch how the blotter turns positive as the market initially gaps down, then fills the gap and continues onward. At one point we're down $900 in unrealized losses (but with protective stops on all trades). Skip to the 1:00 minutes mark to see The OddsMaker results of the strategy being traded. These are good results to imulate.

The videos of Trade-Ideas' automation on our YouTube Channel offer views of our practice sessions in the market using real capital and real market situations. Viewers see the real-time idea generation alerts of Trade-Ideas PRO that's based on the tested, trading plan results modeled in The OddsMaker and then ask, "Excuse me, can I buy or receive the strategies shown in the videos?"

Sure. But It Will Cost You More Than You Know

Requests like that reveal a weakness in a person's approach to trading and forecast likely disappointment in automated and regular trading. The reason points to a lack of willingness to develop the safety net of critical trading skills that inform and instruct a trader how to react instinctively when (not if) the market adapts and changes. This is one of the many messages offered in Dr. Brett Steenbarger's highly praised, Enhancing Trader Performance.

Although automated trading does utilize sophisticated technology to do things that are impossible to do by hand, automated trading is not a substitute for hard work. To create the strategies in the videos, we spend time with the software and model trading rules with The OddsMaker. It is our mission to share with you, dear reader, all the lessons we learn from this process, but simply providing the strategy that may work today, this week, or even next may not stay that way. If you are not familiar with the underlying assumptions and tests that helped developed the strategy, you're less likely to react well and understand transition points. And where we haven't learned lessons ourselves, we'll share with you individuals who thankfully use Trade-Ideas and share theirs.

People like Dave Mabe from StockTickr.

Below are some pretty common mistakes that people make over and over again when using the Automated Stock Trading Robot. Each of these items are lessons we've learned for you. Understand them and your practice sessions will be that much more productive. This is the original post that Dave created and below is our version.

Practice, it turns out, makes you competent on the way to being perfect.

The list not in order of importance:

Trading Too Large, Too Soon - It’s tempting to start trading with size soon, especially when you look at the results of a backtest for a decent strategy. As with any new trading strategy, but especially with automated trading, you need to trade really small in the beginning - so small that 10 or more losing trades (with slippage!) in a row will do no emotional harm to you (I’m not kidding here).

Trading Strategies that Trade Too Frequently - There are strategies out there that you can find pretty easily that trade over 100 times a day that appear to be really profitable in a backtest - certainly when you look at the number of dollars per day. Besides the fact that you probably don’t have the account size to trade this system profitably, taking too many trades will make it much harder to go back and examine the trades. If anything, you should start off trading too infrequently (like 50 - 100 trades over a 3 week span).

Market vs Limit - Probably the biggest mistake that you can make at first is sending the robot to enter positions at MARKET. Market orders will cause serious slippage and you will over-trade. So far in all the videos that you see on our Youtube channel we ONLY USE LIMIT ORDERS to get into our trades. We know that we will not be in everything but the things we enter will be much closer to the backtested results in terms of entry price.

Not Spending Time Learning Why Some Unprofitable Strategies Backtest so Well - The quicker you learn this the better off you’ll be. Once you understand why some unprofitable strategies can be made to look awesome in a backtester, you’ll learn how to recognize if the strategies you model are showing backtest success because of these reasons and you’ll be able to avoid them. Remember that the computer simply prints the price of the alert as your entry price. It simply cannot take into account the fact that your order, no matter how small, does have impact on the market. When you combine that impact on entry and add the impact on the exit what you end up with is often a losing strategy.

Manually Overriding Your Automated System - There are situations where it makes sense to do this, but introducing your discretion makes testing and improving your performance more difficult. Remember you ran the numbers before you got started so there is no reason to think you can out guess the market just because you are watching it. For every trade you manually override and make money there will be ones that cost you significant amount of money. You are just adding uncertainty to your analysis and that is never a good thing.

Acting Like It's a Sprint When It's Really a Marathon - Automated trading is not, well, automatic. It takes time and hard work and money to start off. Even if you had the systems you see on Youtube, what do you think would happen when the market dynamic shifts? Those systems will stop making money and it will be up to you to work with the software to find where the next edge is located. If you do not learn how to do that you will fail. Make sure you leave yourself plenty of rope, because it will take some time and “tuition” to figure out what works. Many times small adjustments can make a huge difference in a strategy’s performance.

Using Stops that are Too Tight - We see this time and time again in every type of trading and it’s no different in automated trading. In fact, the effects of using stops that are too tight are magnified. You’ll have a better chance at success if you look for the loosest stops and work down if your live trade analysis concludes that they’re too loose.

As you can see, successful automated trading is still hard work just like any other kind of trading. However, the obvious benefits are simply too good for us to ignore.

Monday, December 08, 2008

The latest videos from Thursday, December 4th and Friday, December 5th are posted on the Trade-Ideas YouTube Channel. Each day took a different path on its way to a profitable P&L. Our approach with the automation is to use 3 Long strategies and 3 Short strategies (not necessarily the flip of the other). These strategies are run through our backtesting module, The OddsMaker, to ensure high odds of success before a dime of capital is committed.

2 Different Routes to the Endzone

Thursday's trading session started from a deep hole thanks to several early hits when the strategies began trading. With stop losses in place and a detemination not to step in manually, following the trading rules proved wise as the trades rebounded to the positive. Some tense minutes to watch.

Friday started out very profitable - with one position in CWEI responsible for an entire point - before giving up almost half of that in a severe pullback. Ultimately the strategies held onto their gains, but after we decided to step in and switch to manual control to get out of all the positions for a profit.

The video is much shorter - we're getting the hang of this and cutting to the chase quickly

The platform through which we automate trades features our partnership with Assent brokerage.

We can (and have already) created automated trading solutions for various brokers. Is yours one of them? If not, give him/her a phone call and become a squeaky wheel - you'll be amazed at how badly they want you trading with them.